In early June I spent a few days in Mexico City. The main purpose of the trip was to participate and give a keynote at the 2016 Cumbre de Directores (Director’s Summit), a conference sponsored by Endeavor Mexico in collaboration with the IPADE Business School. Endeavor is a global not-for-profit organization dedicated to long-term economic growth by supporting high-impact entrepreneurship in over 25 cities around the world, including Mexico. The Director’s Summit is Endeavor Mexico’s major annual meeting, bringing together over 400 entrepreneurs and senior executives.
My talk was focused on the changing nature of innovation in the digital economy. A major part of the talk included a discussion of innovations in the digital payments and financial services ecosystem. My keynote was followed by two separate FinTech panels, where different entrepreneurs discussed the importance of FinTech in Mexico as well as their individual companies’ efforts in the area. That same evening I attended and spoke at a reception sponsored by Angel Ventures Mexico, an early stage VC firm where I also heard quite a bit about FinTech startups. My overall impression is that there’s considerable FinTech activity in Mexico, a large portion of which is aimed at financial inclusion.
Every year, the World Bank publishes the Global Findex database, a measure of financial inclusion around the world, including how individuals save, borrow, make payments and manage risks in over 140 countries. According to their latest report, – Global Findex 2014, – 62 percent of adults worldwide have an account at a bank, at another type of financial institution, or with a mobile money provider, – up from 51 percent in 2011. The 2014 report also noted that 2 billion adults remain without an account around the world, a 20 percent decrease from the 2.5 billion unbanked adults in 2011. Technology advances, particularly the rapid growth in mobile devices and digital financial services, are the major reasons for these dramatic improvements.
The Global Findex database includes data for each individual country. Their 2014 data for Mexico showed that about 39 percent of adults had accounts with financial institutions, – a significant improvement over the 27.4 percent of adults with accounts in 2011. But, Mexico still lags many of its peers in Latin America. Over half of all adults have financial accounts in Latin America as a whole, significantly above Mexico’s figure.
It’s thus not surprising that entrepreneurs see a business opportunity in providing financial services to the large fraction of the working population in Mexico’s informal economy who are not officially involved with financial institutions or monitored by government agencies. Informal labor markets represents a significant portion of the economies of developing countries like Mexico, providing jobs and incomes to the large portion of the working population outside the countries’ formal economy. But its members are mostly unbanked, lacking the financial histories and credit ratings that are generally required to establish a banking relationship.
The Opportunities of Digitizing Payments, – a report published in 2014 by the Gates Foundation, the Better than Cash Alliance, and the World Bank, – noted: “Studies show that broader access to and participation in the financial system can reduce income inequality, boost job creation, accelerate consumption, increase investments in human capital, and directly help poor people manage risk and absorb financial shocks.” The digitization of payments has a major impact on broad-based economic growth, financial inclusion, and women’s economic empowerment, helping to overcome the costs and physical barriers that have beset otherwise valuable financial inclusion efforts. “Digital platforms offer the opportunity to rapidly scale up access to financial services using mobile phones, retail point of sales, and other broadly available access points, when supported by an appropriate financial consumer protection framework.”
“Account ownership is a first step towards financial inclusion,” added the Global Findex report. “But what really matters is whether people actually use their account – and the data are promising. More than 65 percent of account users in developing countries report having used their accounts at least three times a month, to save, or to make or receive electronic payments directly from their account. Yet, 1.3 billion adults with an account in developing countries pay their trash, water, and electric bills in cash, and over half a billion adults with an account in developing countries pay school fees in cash.”
“Financial inclusion also allows people to manage risks by providing a safe place to save money for emergency and giving them access to credit when needed: 28 percent of adults – 1.2 billion adults – in developing countries report they would use their savings in case of an emergency. Yet 56 percent of these adults do not save at a financial institution.”
In developed markets, FinTech innovations are primarily aimed at improving the mobile payments user experience. But, for the billions around the world without access to traditional financial services, FinTech innovations go well beyond convenience. FinTech could be their ticket to financial inclusiveness and membership in the global digital economy.
“High unbanked population, weak consumer banks and high mobile phone penetration make emerging markets ripe for FinTech disruptions,…” says Digital Disruption: How FinTech is Forcing Banking to a Tipping Point, an excellent report by Citigroup released earlier this year. “In our view, new entrants have a greater chance of success in markets with underdeveloped or fragmented banking systems accompanied with a high level of digital readiness. Emerging market banks are more at risk of market share shift – or more likely lost future retail growth opportunity. Smartphone penetration is higher than banking penetration in many emerging market countries and many emerging markets are digital leaders while they are banking laggards.”
“Banks, emerging market banks in particular, often tend to focus on the wealthy and mass affluent segment of the population. Where wealth is concentrated in a small segment of the population there is a long tail of lower value bank customers that can be captured by FinTech companies with a lower cost to serve model. Another important factor is the more pragmatic regulatory environment in some emerging market countries such as China and Kenya towards FinTech innovators… Not surprisingly, policymakers look favorably at FinTech as part of the solution to financial inclusion.”
In emerging markets, FinTech could lead to a revolution in financial inclusion, a textbook case of disruptive innovations, as defined by Harvard business professor Clayton Christensen in his various papers and books over the past few decades.
As Christensen explained in a recent Harvard Business Review article, disruption is “a process whereby a smaller company with fewer resources is able to successfully challenge established incumbent businesses.” Rather than focusing on incremental improvements to existing products and services, disruptive innovations appeal to new or less-demanding customers whose needs have not been served by incumbent providers, mostly because they’re not as profitable as their present customers. Startups generally succeed by reaching brand new customers whose needs were previously unserved by existing products, rather than by competing directly against entrenched offerings.
Such a disruption is now taking place in the finance industry, with FinTech startups addressing the large number of potential customers that’ve long been left behind by traditional financial institutions, especially in emerging economies like Mexico where the need is greatest. The digital revolution is finally reaching the banking industry, and it will be interesting to see whether incumbent institutions embrace FinTech innovations before FinTech startups gain scale and distribution. While it’s difficult to predict how it will all play out over the years, the game is most definitely on, as I learned during my recent trip to Mexico.